Fw: Investor's Eye: Update - Tata Chemicals (Annual report review), Transmission and distribution (PGCIL's ordering trend shows competition remains intense)

 

 

Investor's Eye [August 29, 2012]  Sharekhan www.sharekhan.com

Summary of Contents Tata Chemicals Cluster: Vulture's Pick Recommendation: Hold Price target: Rs338 Current market price: Rs305 Annual report review  Key points Stable performance after a gap of two years: In FY2012, Tata Chemicals Ltd (TCL) posted a recovery in its financial performance with a growth of over 20% each in the consolidated revenues (to Rs13,806 crore) and the consolidated adjusted net profit (to Rs838 crore). The operating profit margin (OPM) also remained stable at 16.7% in FY2012 as compared with 16.9% in FY2011. Part of the revenue growth was aided by incremental inflows of Rs316 crore (Rs250 crore from an increase in the stake in British Salt; Rs66 crore from the acquisition of Metahelix Life Sciences [Metahelix] under Rallies India) from the inorganic initiatives taken in Q4 FY2011. All geographies performed well with over 20% growth each in the stand-alone Indian entity, Tata Chemicals North America Inc, and the Kenyan and UK operations.  Increase in working capital puts pressure on free cash flows: In the Indian operations, the cash flows from operations after working capital adjustments declined to Rs341 crore in FY2012 as compared with Rs424 crore in FY2011 largely due to an increase in the inventory and receivables. However, the company was able to maintain the debt: equity ratio at 0.9 despite an increase of Rs832 crore in the total debt during the year. The company's net debt increased by Rs498 crore to Rs4,268 crore as on March 31, 2012.  Return ratios improve; dividend pay-out ratio declined in FY2012: The company's return ratios rose from the levels of FY2011 and remained higher during FY2012. The return on equity (RoE) stood at 13.1% while the return on capital employed (RoCE) stood at 15.7% during the year as against 12.0% RoE and 14.0% RoCE in the previous year. The dividend pay-out ratio for the company declined from 37% in FY2011 to 30.4% during FY2012.  Outlook and valuation: Given the input cost pressure across segments and the lower sales volumes in the fertiliser segment, TCL is expected to show a relatively muted performance on the earnings front going ahead. Consequently, we maintain our Hold recommendation on the stock with a price target of Rs338. At the current market price the stock is trading at 10.9x and 10.5x its FY2013E and FY2014E earnings respectively. SECTOR UPDATE Transmission and distribution PGCIL's ordering trend shows competition remains intense  Key points PGCIL's ordering surges on a lower base: The order awarding activity of Power Grid Corporation of India Ltd (PGCIL) picked up in June this year boosted by an 800KV HVDC order worth Rs2,495 crore. In FY2013 year till date (YTD; till July), PGCIL has awarded projects worth Rs4,327 crore excluding the HVDC order (a sharp rise on a low base). Historically, the first half is weaker for the company in terms of ordering and accounts for merely 20-30% of the annual orders.  Foreign players corner higher share: Foreign players (mainly Chinese and Korean) continued to increase their market share in the reactor and sub-station segments where most of the ordering took place in FY2013 YTD. Their market share rose substantially to 32% in the overall ordering from 10% in FY2012.  Intense competition raises uncertainty for domestic players; we remain cautious: Uncertainty over the order inflow activity amid intense competition and margin pressure would keep the sentiment bearish for the transmission and distribution (T&D) stocks. This trend is also reflected in the falling success rate of the bids of the key T&D companies like Crompton Greaves Ltd (CGL) and Bharat Heavy Electricals Ltd (BHEL). Both these companies have yet to win an order in FY2013. The continuous presence of the overseas companies, mainly Chinese, and the intensifying competition locally are likely to eat into the market share of the traditional T&D stocks, such as ABB, Siemens, CGL and Alstom T&D India. Hence, we maintain our cautious stand on these stocks. Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Investor's Eye: Update - Bajaj Corp (Annual report review), Gas transportation (Business environment toughens); Market outlook - (Negotiating within a range)

 

 

Investor's Eye [August 28, 2012]  Sharekhan www.sharekhan.com

Summary of Contents Bajaj Corp Cluster: Ugly Duckling Recommendation: Hold Price target: Rs177 Current market price: Rs163 Annual report review  Key points FY2012 margin affected by high input cost: In FY2012 Bajaj Corp posted a strong top line growth of 31% year on year (YoY) driven by a strong sales volume growth of 21.44% (in the flagship brand Bajaj Almond Drops, which grew by ~20% YoY in the fiscal). However, the operating profit margin (OPM) contracted by 566 basis points YoY to 24.6% largely on account of the higher prices of the inputs (notably LLP and refined oil) and higher advertisement spending to support Kailash Parbat Cooling hair oil launched at the start of FY2012. Hence, the adjusted profit after tax (PAT) grew by 16.5% YoY to Rs120.1 crore. The highlights of the fiscal were the improvement in the sales volume growth to 21% (from ~15% in FY2011) due to an improvement in the penetration and expansion of the distribution reach and the launch of Kailash Parbat Cooling hair oil. The only disappointment was the investment of Rs75 crore in some non-yielding assets (acquisition of land in Worli, Mumbai).  Inventory days increased in FY2012: The inventory days rose to 47 days in FY2012 from 34 days in FY2011. This led to a positive operating cash cycle to three days from minus 11 days earlier. We believe the inventory days could have increased due to the stocking up of raw materials in the face of a sharp increase in the prices of some of the key commodities. However, we expect the operating cash cycle to improve in the coming years.  Return ratios decline on a high base: Bajaj Corp's return ratios declined in FY2012 largely on account of a high equity base due to the raising of funds through an initial public offering. In FY2012 the return on net worth (RoNW) and the return on capital employed (RoCE) stood at 29.9% and 37.6% as against 51.0% and 61.4% respectively in FY2011. With a sustained strong top line growth and an improvement expected in the margins, the return ratios are likely to improve in the coming years.  Cash and cash equivalents of above Rs350 crore: Despite a dividend payment of Rs68.6 crore and the acquisition of the non-yielding assets worth Rs75 crore, the company's cash and cash equivalents stood at Rs340 crore in FY2012 (a little lower than Rs410 crore in FY2011). With the operating cash flow poised to improve, the cash balance is expected to improve too in the coming years. The management has indicated the cash balance of close to Rs350 crore will be extensively utilised for future growth prospects (including acquisitions in the domestic personal care space). Outlook and valuation: With the company's volume growth likely to remain in strong double digits, Bajaj Corp is expected to maintain the strong revenue growth momentum in the coming years. With the prices of the key inputs stabilising in recent times, the OPM is expected to improve in FY2013 and FY2014. Overall, we expect the company's top line and bottom line to grow at a compounded annual growth rate (CAGR) of 23.4% and 25% respectively over FY2012-14. Any inorganic growth activity would improve the growth prospects of the company in the long run. At the current market price the stock trades at 15.4x its FY2013E earnings per share (EPS) of Rs10.5 and 12.8x its FY2014E EPS of Rs12.7. We maintain our Hold recommendation on the stock with a price target of Rs177. SECTOR UPDATE Gas transportation Business environment toughens Key points The business conditions have worsened for the gas transportation and distribution companies with the mounting regulatory pressure to reduce tariffs on the one hand and the depleting domestic gas supply on the other hand.  The situation has resulted in a severe de-rating of the valuation multiples of the companies operating in this space. However, we believe that the regulatory activism would continue to act as an overhang on companies like Gujarat Gas Company Ltd (GGCL), Gujarat State Petronet Ltd (GSPL), Indraprastha Gas Ltd (IGL) and GAIL.  Among these companies, we actively cover GAIL and believe that most of the negatives are already factored in the price of the stock and the stock is least affected by the regulatory uncertainties; therefore, GAIL remains our preferred pick in the sector.   GAIL is the least affected; we prefer GAIL  Given the environment where the regulator has criticised the arbitrary pricing of gas by the CGD companies, there could be some steps in the future to regulate the price (a uniform gas pricing policy could be the outcome). Eventually, this could lead to a contraction in the margins and return ratios of the gas distribution companies, especially the less regulated CGD companies. We believe though IGL's case is being highlighted currently, but the regulation, if it comes, would affect all CGD players adversely. We see the possibility of contraction in the margins and returns ratios of these companies. Hence, we opine the sector would witness regulatory headwinds in the future which will affect their earnings and valuations. However, we believe GAIL would be the least affected in the scenario foreseen as most of the pipeline of the company is already regulated and approved by the regulator. Therefore, GAIL remains our preferred pick in the sector with a price target of Rs410, which allows for a 16% upside potential. MARKET OUTLOOK Negotiating within a range  It is prudent to turn cautious near the higher end of the market's multi-month trading range Market climbs the wall of worries: Contrary to the consensus opinion but in line with our positive stance, the market moved closer to the higher end of its multi-month trading range rather than grinding down towards the lower end of the range. We had stated in our earlier report that the emerging positives globally and domestically coupled with the acute despondency and polarised short view would make the following two months relatively better than the previous two months. In spite of a deterioration in the economic data points and a fairly weak monsoon this year, the market's resilience has surprised positively.  Q1FY2013; so far, so good: Though the macro situation remains challenging, the headline corporate earnings growth sustained at a double-digit level (over 10%) in Q1FY2013. The performance was aided by State Bank of India, the oil companies (GAIL, Oil and Natural Gas Corporation; due to lower than expected provisions for the under-recoveries) and a few other companies. On a broader basis, in spite of around 14% growth in the revenues, the earnings of around 1,150 companies declined by 19% largely due to margin pressure and a surge in the interest cost. The silver lining is that the downgrade in the consensus earnings estimates slowed down considerably post-Q1FY2013 results as compared with the sharp cuts seen after the Q4FY2012 results. Globally; euro remains fragile; fiscal cliff in USA emerges as a key worry for equities: Though the European debt crisis is occupying a lot of attention, but there has been insignificant structural action to resolve the same. The markets expect the European Central Bank (ECB) to continue to support the bonds of the peripheral nations (Spain, Greece etc) but the euro nations dither on the rescue policy for these countries. On the other hand, in the USA the presidential elections and an impending fiscal cliff (the impact of around $500 billion due to expiring tax concessions) is making investors nervous. The US markets have firmed up due to better than expected data releases but that also casts a shadow on the third round of quantitative easing (QE3), which many people expect by Q4CY2012. Near higher end of trading range; time to take some money off the table: The Nifty has moved in a broader range of close to 1,000 points (4,600-5,600) for the last 18 months. After the recent upmove, it has moved closer to the higher end of the trading range. Crude oil prices have also firmed up recently which coupled with the potential populist measures (due to a weak monsoon) could delay or slow down the expected pace of monetary easing (or policy rate cuts) in the system. The political impasse after the publication of the Comptroller and Auditor General of India (CAG)'s report on a coal scam is likely to block any fiscal measures by the government. Thus, we see no major trigger for the market to convincingly break out of the 18-month range. It would be only prudent to turn a bit cautious and take some money off the table (if you have a very active investment strategy).  Valuation still at discount to LPA, defensives to stay in vogue: In terms of valuations, the Sensex is trading at 13.2x one-year forward estimated earnings, which is below the long-period average (LPA) multiple but not at a significant discount, unlike the case two months back. Also, given the multiple concerns surrounding the global and domestic economies, the re-rating of the market seems difficult. However, we believe that the valuation gap between the defensives and the cyclicals has widened to historic levels.   Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Investor's Eye: Update - Apollo Tyres (Drive with caution; price target under review), Bharat Electronics (Annual report review)

 

Investor's Eye [August 27, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Apollo Tyres Cluster: Apple Green Recommendation: Hold Price target: Under review Current market price: Rs95 Drive with caution; price target under review  Key points The crucial Bandung conference aiming to restrict fall in natural rubber prices Thailand, Malaysia and Indonesia (accounting for 70% of world's rubber production) are expected to meet in Bandung, Indonesia in the first week of September 2012 to discuss ways to stabilise natural rubber prices. The chairman of the Malaysian rubber board has hinted that natural rubber prices can increase by 33% after the crucial Bandung conference.  We believe that the outcome of the Bangdung conference would have a significant influence on natural rubber prices (in either direction) and a direct bearing on the margins of the tyre manufacturers. International natural rubber prices dropped 30% from their highs; failed to recover International natural rubber prices failed to recover significantly from the lows of Rs151/kg even after the announcement of the crucial tripartite conference. In Thailand the prices of RSS-4 grade rubber touched the high of Rs240/kg and have been sliding over the last three quarters.  Some media reports indicate that the tripartite rubber producers are planning to cut down aging trees across 1 lakh hectares. These countries may also cut exports by 3 lakh tonne to contain the global prices. Valuation: Sharp run-up in stock pricing in the positives; Hold We believe that the sharp run-up in the stock price has priced in the positives of the lower natural rubber prices. Of late, too many uncertainties have cropped up over the price of natural rubber due to cartelisation by the key rubber producing countries. Also, the strength in crude-linked raw materials together with the weakness in the local currency may negate the benefit of the weak natural rubber prices. In the current context, we await greater clarity on the fall-out of the Bandung conference. We change our recommendation to Hold and have kept our price target under review.   Bharat Electronics Cluster: Apple Green Recommendation: Buy Price target: Rs1,685 Current market price: Rs1,228 Annual report review  Key points Falls short of its revenue target: Bharat Electronics Ltd (BEL) reported a growth of 3.1% in its gross revenues to Rs5,703.6 crore in FY2012 as against a revenue target of Rs6,200 crore. The key reasons for the revenue miss were the delay in receiving the bulk production clearance for new products and the partial receipt of items from the consortium partners. The export revenues for FY2012 were down to $38.45 million against $41.53 million in FY2011. Going ahead, the management has set a revenue target of Rs6,300 crore for FY2013, expecting a growth of 10.5%. On the back of a strong order book of Rs25,748 crore, the company has already orders worth Rs5,650 crore available for dispatch in FY2013. Margin falters: The operating profit margin (OPM) crashed by 680 basis points to 9.2% in FY2012. The drop was mainly on account of the lower than expected revenues and a higher contribution from the low-margin civilian sector. The civilian sector contributed 27% of the total revenues, up from 20% in the previous year. The orders executed in FY2012 were mainly asset heavy and with lower value-addition which led to the lower margin. Going ahead, the management expects the contribution from the defence sector to rise to 80% leading to a margin improvement. The other income surged by 81% to Rs703.1 crore on the back of a strong cash reserve in the books. On a reported basis, the net profit was down 3.7% to Rs829.9 crore.  Working capital remains negative: The working capital for the company remained negative at Rs1,999 crore (129 days) on the back of the high customer advances received by the company. The customer advances increased to Rs7178.1 crore, up from Rs6441.1 crore in FY2011. The debtor days improved to 174 days from 194 days in the previous year whereas the loans and advances deteriorated to 113 days from 37 days mainly on account of the advances to the suppliers. Soft performance and high cash reserve affecting return ratios: BEL continues to have a strong cash balance with the cash reserves standing at Rs6,772.5 crore at the end of FY2012, ie 120% of the Rs5,637 crore capital employed by the company as at the end of FY2012. The higher cash reserve along with a poor operating performance led to the lower return ratios. The return on capital employed (RoCE) decreased to 19.6% from 22.8% in FY2011. The return on equity (RoE) also decreased to 14.7% from 17.2% in the previous year with the net profit margin (NPM) declining to 14.7% from 15.7% in the previous year.  Valuation and view: BEL is one of the strongest plays on the Indian defence sector. The financial year 2012 saw a soft performance mainly due to a delay in obtaining production clearance. However, going ahead we remain assured of a stronger FY2013 on the back of a strong order book of Rs25,829 crore and the management's commitment of a better FY2013 with a revenue target of Rs6,300 crore. The company is sitting on a huge cash reserve of Rs6,772.5 crore which translates into cash of Rs847 per share. This would cushion the downside. We remain positive on BEL with a 12-month perspective. We maintain our Buy rating and price target of Rs1,685 for BEL. At the current market price, the stock trades at 11.6x FY2013E and 10.5x FY2014E earnings. Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Investor's Eye: Special - Q1FY2013 earnings review, Q1FY2013 Auto earnings review, Q1FY2013 Telecom earnings review, Q1FY2013 Pharma earnings review

 

Investor's Eye [August 22, 2012]  Sharekhan www.sharekhan.com

Summary of Contents SHAREKHAN SPECIAL Q1FY2013 earnings review   A few sparks amid a soft quarter Double-digit earnings growth aided by oil companies (ONGC, GAIL) and SBI: On an aggregate basis the Sensex' earnings for Q1FY2013 grew by 10.3% year on year (YoY) against our estimate of 13%. However, the earnings growth was bolstered by a strong growth in the profit reported by State Bank of India (SBI; due to a low base of Q1FY2012) and a higher than expected earnings growth in the oil companies (ONGC and GAIL) due to a lower than expected provision for the subsidy burden. Excluding SBI, the aggregate earnings of the Sensex grew by 5.5% and excluding SBI and the oil companies (ONGC, GAIL) the earnings growth was flattish (-0.4%) YoY.  Top performers and losers: About one-third of the Sensex companies reported a year-on-year (Y-o-Y) decline in their adjusted net profit during the quarter. Among the top three Sensex companies that surprised positively were GAIL, ONGC and Mahindra and Mahindra (M&M). On the other hand, among the Sensex companies the key disappointments came from Tata Power, Jindal Steel & Power and Bharti Airtel. Revenue growth slips below 20%: The aggregate revenue growth of the Sensex companies was in line with our estimate at 17.4% YoY, which was lower than the 20.3% year-on-year (Y-o-Y) growth in Q4FY2012. The growth in the revenues was led by the pharmaceutical (pharma), information technology (IT) services and automobile (auto) sectors. Private banks continued to post a healthy performance though SBI's top line growth was affected by a decline in the margins.  No respite from margin pressure: During the quarter the EBITDA margin of the Sensex companies (ex banks) declined to 18.4% (vs our estimate of 18.3%) from 20.4% in Q1FY2012. The major stress was seen in metal and capital goods stocks as well as Reliance Industries Ltd (RIL). The decline in the output of the high-margin gas production significantly dented RIL's profitability during the quarter. However, the EBITDA margin in the auto and IT sectors remained stable as compared with Q1FY2012. Macro environment challenging; corporate earnings growth sustains at double digits: Despite the adverse business environment, the aggregate earnings of the Sensex continue to grow at a rate of over 10%. This is likely to sustain unless the consumption demand also deteriorates sharply. Moreover, in spite of the weak monsoon, the pace of the downgrades in the consensus earnings estimates was relatively low (0.6%) as compared with the steep downgrades seen post-Q4FY2012.   Q1FY2013 Auto earnings review    Drive with caution Auto sector reported flat growth for Q1FY2013; has given lacklustre returns in last six months: In our Thematic Report dated December 27, 2011, we had expressed concerns over the moderation in growth of the automobile (auto) sector with the full impact of the moderation expected in H1FY2013. As against the benchmark index' return of 13% between December 27, 2011 and August 21, 2012, the auto stocks under our coverage too gave an average return of 13%. The best return of 57% came from Apollo Tyres, our top pick for the last six months. The next highest return came from Maruti Suzuki at 22% due to the stock sell-off on account of the Manesar strike. Excluding these two stocks, the rest of the universe gave a negative return of 0.5% between December 27, 2011 and August 21, 2012. As we analyse the Q1FY2013 results, our coverage universe saw a profit after tax (PAT) growth of merely 2%. Our auto tracking universe of 15 companies, ex Tata Motors, saw a PAT growth of 2.5% year on year (YoY); that with Tata Motors saw a PAT growth of 11% YoY during the same period.  M&M added to our conviction list on robust Q1FY2013 performance: During the past six months, most of the stocks under our coverage except Apollo Tyres had been kept on Hold recommendation. We recently added Mahindra and Mahindra (M&M) to our Buy list as we see it as a proxy play on food inflation and best positioned to benefit from the reviving rural incomes (refer to our Stock Update report on M&M dated August 21, 2012).  Apollo Tyres, M&M and Tata Motors top revenue earners; Maruti, SKF laggards: Apollo Tyres saw its Q1FY2013 PAT growing the most, by 79% YoY, on a strong operating performance. Tata Motors, M&M and Suprajit Engineering also reported a 20% plus Y-o-Y earnings growth. The disappointment came from Maruti Suzuki and SKF India, both of which reported an earnings decline of over 20% YoY for the quarter.  Outlook and valuation: Going forward in H2FY2013 and FY2014, barring a few companies like Maruti Suzuki, which would grow on a low base, a large part of the earnings growth is expected on an improved operating performance in H2FY2013 and FY2014. The volume growth may remain modest, but the raw material pressure is expected to moderate for most companies in H2FY2013. After keeping most auto companies on Hold for the last six months, we have added M&M to our Buy list along with Apollo Tyres. The outlook on most other companies looks cautious as multiple factors related to competition, inventory build-up, global slowdown and fuel price hike continue to weigh on the auto sector.   Q1FY2013 Telecom earnings review    Competition intensifies, regulatory risk persists; cautious view maintained  Weak results fail to meet expectations: The Q1FY2013 results of the telecommunications (telecom) companies tracked by us, ie Bharti Airtel and Idea Cellular, were below expectations on all the fronts, viz revenue, margin and earnings. Bharti Airtel's performance was weak in both South Asia (including India) and Africa. The company's consolidated top line grew at 3.3% on a quarter-on-quarter (Q-o-Q) basis, with the operating profit and the net earnings showing a sequential decline of 6.2% and 24.2% respectively. For Idea Cellular, the top line grew at 2.5% quarter on quarter (QoQ) while the adjusted operating profit and the earnings witnessed a sequential decline of 4.8% and 1.5% respectively. The margin of both the players took a solid hit-Idea Cellular's margin was down 200 basis points QoQ (from 28.1% in Q4FY2012 to 26.1% in Q1FY2013) while Bharti Airtel's consolidated margin contracted by 310 basis points QoQ from 33.3% in Q4FY2012 to 30.2% in the quarter under consideration.  Volumes expand; profit contracts: As expected the traffic momentum remained strong during the quarter, with both Idea Cellular and Bharti Airtel registering a sequential volume expansion of 3.9% and 5% respectively. This good volume growth was achieved on the back of the already solid Q4FY2012 volumes, but at the cost of profitability. Both the players experienced a decline of 2.5% in the average realised rate on a sequential basis which was the prime reason for the fall in the profitability, as visible in the report card. Business competition intensifies, this time the leader leads: The competition in the Indian wireless industry has intensified. The price increases taken by the players earlier have not been sustainable and the price war has started again in the market, this time led by the industry leader itself, ie Bharti Airtel. Bharti Africa-targets realigned with reality: On the African business front as well, Bharti Africa's Q1 performance was dissatisfactory with a flat revenue growth and a 200-basis-point Q-o-Q contraction in the margins. In the conference call of Bharti Airtel, the management confirmed that the business environment in Africa is also facing challenges on multiple counts, ranging from the euro zone crisis and volatile commodity prices to the general political environment in each African country. It echoed our longstanding stance that it would be difficult for the African business to achieve its stated revenue and EBITDA guidance of $5 billion and $2 billion respectively in FY2013 and postponed the guidance. Regulatory environment weighs heavy on fundamentals and stock price movement: The Indian telecom sector is passing through a phase of high policy uncertainty, where various contentious issues that could affect the earnings/cash flow and competitive positioning of the players remain unsettled (read, licencee renewal norms, spectrum refarming process etc). Further, the cabinet's decision of fixing the all-India 2G base price at Rs14,000 crore would hurt the operators, investors and consumers. We believe that the news flow in this sector would be very fluid. Hence, any positive or negative development would swing a stock's performance in the northward or southward direction respectively. Reduced estimates and downgraded rating: Taking cognisance of the changing business environment and the unhealthy regulatory developments, we have reduced our estimates for both Bharti Airtel and Idea Cellular. Bharti Airtel has missed analysts' expectations for around seven to eight quarters in a row for various reasons ranging from a competitive environment to regulatory issues. We expect Bharti Airtel to continue to safeguard its subscriber base and revenue market share at the cost of profitability. This is likely to keep the South Asian business' margin under pressure in FY2013. Further, the African business is also not showing the required elasticity and agility. Thus, we have downgraded our EBITDA and earnings estimates for FY2013 and FY2014. Our new earnings per share (EPS) estimates for FY2013 and FY2014 are Rs11.9 (vs Rs14.3 earlier) and Rs15.7 (vs Rs18.8 earlier) respectively. Based on the new estimates and looking at the tough competitive as well as ambiguous regulatory environment, we reduce our target EV/EBITDA multiple for Bharti Airtel from 7x to 6.5x its one-year forward FY2014E earnings to arrive at a new price target of Rs310 (against Rs362 earlier) and downgrade our rating on the stock from Buy to Hold.   Q1FY2013 Pharma earnings review   Weaker rupee and key launches drive growth Pharma universe's performance better than expected: Most of the players in Sharekhan's pharmaceutical (pharma) universe reported better than expected results during Q1FY2013. The universe reported a 39.7% year-on-year (Y-o-Y) rise in its revenues as compared with our estimate of a 34.7% growth. The operating profit margin (OPM) jumped by 412 basis points year on year (YoY) to 27.6%, which is 270 basis points higher than our estimate. However, due to a sharp jump in the fixed costs and marked-to-market (MTM) foreign exchange (forex) losses, the reported profit rose by 9.6% YoY for the pharma universe during the quarter. However, excluding the forex losses or gains and the exceptional items, the adjusted net profit increased by 18.5% YoY, which is better than our estimate of a 7.4% growth for the universe. The profit growth was mainly led by Ipca Laboratories (Ipca; up 93% YoY), Divi's Laboratories (Divi's Labs; up 63% YoY) and Sun Pharmaceuticals (Sun Pharma; 59% YoY).  Higher fixed costs and effective tax rate affects bottom line: Despite the impressive performance at the operating level, the profit of the key players weakened on a sharp rise in the interest and depreciation charges. During the quarter, the interest cost rose by 143% YoY while depreciation jumped by 30% YoY on an aggregated basis. Moreover, the imposition of the alternate minimum tax (AMT) on partnership-based manufacturing units resulted in a sharp rise in the effective tax rate of the pharma universe. The effective tax rate of the universe jumped to 19.8% during the quarter from 11.2% in Q1FY2012. Most affected by the new tax were Sun Pharma (a rise of 1,482 basis points YoY to 17.3%) and Cadila Healthcare (Cadila; a rise of 1,354 basis points YoY to 24.4%) due to the imposition of AMT on their Sikkim-based manufacturing plants. Management of most of key players maintain FY2013 guidance: Most managements maintained their revenue guidance for FY2013 despite an impressive performance in Q1FY2013. We expect the growth to moderate in the subsequent quarter mainly due to a slower growth in the domestic formulation business (from a relatively higher base) and slower depreciation in the rupee against the dollar (up 11% YoY). Nonetheless, strong product pipelines, improved utilisation of the newly commissioned facilities and the contribution from the newly acquired entities would continue to ensure the long-term growth of the pharma universe. Our top pick: We prefer Sun Pharma in the large-cap space due to the strong traction in its US business and its increased focus on the domestic branded formulation business (which has been divested for increased focus). We pick Divi's Labs in the contract research and manufacturing services (CRAMS) space due to the increased traction in the company's CRAMS business and currency benefits. We like Cadila in the mid-cap space for its strong research and development (R&D) for its expected ramp-up in the USA after the US Food and Drug Administration (USFDA) cleared of the company's Moraiya facility and R&D base.   Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.